The National Tax Agency has amended its transfer pricing guidelines to issue to its transfer pricing examiners concerning the implementation of Japan's new transfer pricing documentation rules as well as examinations of transactions involving joint venture companies.

The guidelines continue to instruct the examiners to determine whether there are transfer pricing issues by reviewing various described documents, which now include the documents listed in the pertinent finance ministerial order as of April 1, 2010.

The guidelines also continue to remind examiners that if a taxpayer does not submit the required documents without delay, it shall be possible to apply the presumptive taxation rules or the similar enterprise investigation provisions (which can lead to the application of secret comparables) and they are required to explain these potential consequences to the taxpayer and record such explanations and the subsequent submissions.

However, the amended guidelines now instruct the examiners to request submissions by determining deadlines within a scope recognised to be necessary, and they are to allow for the time ordinarily necessary to prepare the submission based upon listening to the opinions of the taxpayer.

The amended guidelines state that, if the taxpayer itself has computed the arm's-length price, the examiners are to study whether it is possible to calculate the arm's-length price based upon the documents used by the taxpayer and to decide whether it is necessary to request the submission of additional documents. This suggests that, if the taxpayers' original submissions are considered to be insufficient, the examiners should request additional submissions, rather than just decide that there has been a lack of compliance.

The amended guidelines also require the examiners to determine whether it is possible to calculate the arm's-length price by studying the submitted documents comprehensively. This suggests that examiners are to evaluate the submitted documents on an overall basis to determine if it is possible to determine arm's-length prices, rather than to immediately conclude that any failure to submit a document automatically results in a lack of compliance.

However, it is not clear how the above instructions will be applied in practice by particular examiners.

If examiners decide that it is not possible to calculate the arm's-length price based on submitted documents and the presumptive taxation rules or similar enterprise audit provisions apply, the guidelines require that they explain the reasons to the taxpayer.

The guidelines also note that, in a case in which submitted documents were prepared based upon factors such as inaccurate information, the submission does not satisfy the requirements. In such case, the examiners are to request the submission promptly of documents prepared based upon accurate information. Inaccurate information is not defined, so this is left to examiners to determine.

For joint venture companies, the guidelines instruct examiners to sufficiently study the process by which prices were determined in negotiations based upon considering a number of situations. They note that when a taxpayer or its foreign related person had been established by two or more persons, in some cases a person other than a party to the foreign related transaction, such as an investor, was a party to the negotiations. In these situations, the negotiations may have been carried out taking into account the arm's-length principle. However the guidelines also instruct examiners that the existence of certain described facts such as intense negotiations or participation by a third party does not constitute a basis for concluding that a foreign related transaction has been conducted on conditions the same as those as an unrelated person transaction.